Christos Koulovatianos

Professor of Macroeconomics
Department of Economics
University of Luxembourg
162A avenue de la Faencerie

Campus Limpertsberg, BRC 1.06E

L-1511
Luxembourg
Email: christos.koulovatianos@uni.lu

Office hours: by appointment

Course Website

Check Moodle regularly

Economics of Banking (MEF-2)

Syllabus March 2, 2015 (Provisional)

Course Language:
The language of instruction for the course will be English. The questions of the midterm and the
final examination will be offered in the English language.

Brief course description

We will link up standard investment and financial theory with the microeconomic theory of
banks. We will question why banks exist and study what they do, in order to understand the
fragility of the banking sector. We will cover the institutional role of Central banks and we will
formally ask how to set laws that may prevent us from facing banking crises.

Objectives
Banking crises are endemic in all types of economies, both in industrialized and in
developing economies. At the same time, the early development of a strong banking
sector often precedes success development stories of economies. The socioeconomic
problem faced by such facts is what banking laws and rules should a country implement
in order to minimize the possibility of a banking crisis without preventing the
development of the banking sector. In this class we will attempt to give formal structure
to these broad questions. We will start with the question why do banks exist? and we
will focus on the answer given by the asymmetric-information answer, i.e., because
banks have the right to know secrets about their customers, so they can borrow and lend
using those secrets. We will use contract theory in order to understand what guarantees
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Economics of Banking (MEF-2)

banks acquire from their customers in order to establish their credibility. Then we will
study how imperfections in such contract agreements may make banks fragile, paying
also attention to asset-price overreaction in capital markets. Finally we will study the
intervention limits of Central Banks to the banking sector and we will formally pose
banking regulation questions.

List of topics
1. Concepts from investment analysis
2. Asset pricing under complete information (bonds and stocks)
3. Banks in general equilibrium
4. Lender-borrower relationships
5. Credit rationing
6. Banks and the macroeconomy
7. Bank fragility and asset-price overreaction to disaster episodes
8. Default risk and bank fragility
9. The role of central banks
10. Regulation of banks

Textbook
"Microeconomics of Banking" by Xavier Freixas and Jean-Charles Rochet (MIT
Press 1st or 2nd edition) (in English http://mitpress.mit.edu/books/microeconomicsbanking )
There will also be slides and some supporting notes as a complement.

Evaluation
Homeworks (three large problem sets): 15%
Final exam: 85% (dates and places of exams will be announced later)

Exercises for the class

The exercises instructor will be Dimitris Mavridis ( Dimitrios.Mavridis@uni.lu ).
See time schedule and regular updates on Moodle.

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Economics of Banking (MEF-2)